Project Risk Quantification by John K. Hollmann

A Practitioner's Guide to Realistic Cost and Schedule Risk Management

Are you tired of project cost overruns and missed deadlines? Project Risk Quantification delivers the missing piece in project risk management: a proven, data-driven approach to forecasting cost and schedule outcomes with confidence. Written by John Hollmann, a globally recognized expert in cost engineering and risk quantification, this essential guide bridges the gap between traditional risk management practices and real-world project performance.

Drawing on decades of experience, Hollmann introduces a step-by-step framework for identifying, analyzing, and mitigating project risks in capital-intensive industries. This book breaks down complex statistical and analytical concepts into practical tools that project managers, estimators, risk analysts, and decision-makers can immediately apply.

Inside, you will discover:

• * How to move beyond guesswork with empirically-based cost and schedule risk models,
• * The importance of risk drivers over simplistic "range estimating" techniques,
• * Ways to use probabilistic methods to set realistic contingencies and expectations,
• * Real-world case studies that show the consequences of flawed risk approaches and how to fix them, and
• * Guidance on integrating quantitative risk analysis into the project planning lifecycle.

Whether you are managing a multi-billion-dollar infrastructure initiative or a more modest capital project, Project Risk Quantification will change the way you think about uncertainty and give you the tools to make more informed, defensible decisions.

This book is not just theory. It is a practical manual for transforming how organizations predict and manage risk. It is time to replace false precision and gut feel with sound data and proven methods.

Equip yourself with the insights that leading organizations worldwide are using to improve predictability, accountability, and results. Project Risk Quantification is your blueprint for mastering project risk with clarity and confidence.

Good news! John Hollmann has completed Volume 2 for his classic book, Project Risk Quantification.

Volume 2 adds new content to cover a wider variety of industries, address contractor method uses, and add specialized quantitative risk analysis (QRA) methods and applications. It also describes commercial software now available that apply the main methods in the original Volume 1. Finally, it adds a variety of worked risk quantification examples for common use cases along with various other updates.

The original Project Risk Quantification Volume 1 is unchanged and is still the capital project world's best reference for empirically-valid project risk quantification methods and the accuracy data behind them.

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ISBN: 1-941075-02-9. ISBN-13: 978-1-941075-02-9. Published June, 2016. Total pages: 416. BISAC Codes include BUS101000, BUS053000, and BUS042000.

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From the Publisher...

When John contacted us to explore publishing his manuscript, we were immediately interested. I have some experience in the area of cost and schedule risk, including co-authoring a paper with my former colleague Jack Bess (Chevron), which we presented at a DAAG conference. I also facilitated Jack's workshops on several occasions.

I also had extensively and carefully studied Rand's work (which was led by Ed Merrow) on project performance in the mid 1980's while working as a Research Supervisor at the Savannah River Lab (now SRNL). The DOE-funded Rand reports are timeless and are still on my bookshelf. John draws heavily on this work and his experience working at IPA. I was able later to meet and talk with Ed at one of the Chevron CPDEP Forum sessions a few years ago and express my appreciation of his work.

To be honest, I wish I had been able to read John's book thirty years ago! The concepts that he lays out so clearly in this book are things I had to learn the hard way, by trial and error. Every engineer involved in any kind of manufacturing, process, and/or project work needs to read this book, which goes far beyond risk quantifi cation. This book will help you improve the way you approach, implement, fund, and manage projects. It can also serve as a primer to help project engineers understand how projects are developed, planned, and implmented and the myriad of ways that projects can go wrong.

Reviews

• "The author delves into what was previously the black box of risk and contingency estimation, and step by step provides the reader with a route map, tools, and techniques to deliver justifiable and defendable estimates of the range of likely economic outcomes of a project, which decisionmakers can evaluate when considering capital investments. This is a first for the industry and the author is to be congratulated on making this exposure of his intellectual property available for all to use. The author takes his many decades of practical experience and research in the field of project risk estimation and presents it in a direct and straightforward manner for all to use; an extraordinary gift to the profession. - Tony Jervis, Project Services Director, Mining


• "This book is by far one of the most comprehensive compilations on project risk analysis and modeling, inclusive of interesting war stories. It is a must read for everyone who is intimately involved in identifying, managing, and quantifying those risks, from the lowly cost estimator up to the senior business manager. In addition to being a practical reference, the book includes an extensive glossary and questions at the end of each chapter, which make it a great training guide or textbook. - Bruce E. Bradley, Estimating Manager, a Major EPC


• "Working at a private equity fi rm that invests in mining projects, Mr. Hollmann's Project Risk Quantification text is a must read and will be my go-to-guide for many years to come. Private equity investment is all about identifying risks and how to capture these risks quantitatively. John's book takes a smart two-part approach that lends itself perfectly to understand and implement risk quantification at any stage in the project life cycle. It is clearly and concisely written and fi lls a gap that currently exists in the field of risk management. - Edward van Doorn, Project Controls Manager, Resource Capital Funds.


• "John Hollmann's Project Risk Quantification text makes an important contribution to the practice of project appraisals and to project risk management. Realistic quantitative methods absolutely are needed for calculations and meaningful communication. I found special interest in the parametric cost estimation details and the novel discussion of and methods for projects tipping into chaos. - John Schuyler, Principal Consultant and Instructor, Decision Precision and PetroSkills; author of Risk and Decision Analysis in Projects.


• "For those in the trenches of project cost engineering in general, and risk analysis in particular, it is difficult to find practices that are practical and reliable; i.e., that will work on every project. John Hollmann's book not only lays out an integrated set of methods in detail, but documents their basis in empirical reality. The stories are interesting too. For credibility, organizations need strong risk quantification competency in-house and this book provides a great guide for building that competency. - Prashant Srivastava, Manager, Cost Engineering Systems, Enbridge Pipelines, Inc.


• "John Hollmann is well known for his necessarily blunt honesty about project performance and risk, and as a result he is a rare and valued resource to clients and colleagues alike. He tells it as it is, and offers advice in a pragmatic fashion, often accompanied by vigorous debate. Characteristically, this book does the same, imparting decades of hands-on capex risk management and quantification experience in a readily-accessible, engaging, and conversational tone. It provides a practical guide to projects as dynamic systems, and risks that impact both project decision-making and performance. Run, do not walk, to your nearest bookseller. - Alexia Nalewaik, Vice President of Major Projects and Program Management, WT Partnership.


• "John's book demonstrates to users how realistic estimates and forecasts can be created using historical data and proven techniques. A thought provoking guide that delivers a practical starter tool for those who are new to risk quantification and provides experienced parametric estimators with a laser sight for large and small projects. - Laurie Bowman, Principal, Synchrony.


• "Currently, no book in the marketplace addresses the question of integrated project risk analysis and quantification in a realistic way. As Mr. Hollmann makes clear, the prevalent methods fail to predict the cost and schedule overruns that frequent process and other industry projects. His book finally addresses the age-old challenge of how to realistically forecast cost and schedule accuracy while also keeping it practical. The book is comprehensive and addresses all the issues in detail along with interesting examples and anecdotes. Everyone will enjoy reading and using this book! - Kul B. Uppal, Consultant, AACE Technical Director, and former Estimating/Risk lead at oil and gas majors.


• "At a time when capital-intensive industries are very prudent with their investments and tempted to demand certainty from project teams, this book comes in handy to equip risk professionals and management with the framework and toolset required to understand, quantify and communicate project risks. Whether you are risk pro or a senior manager, set aside your pre-conceived notions about what makes capital projects successful; follow John as he debunks industry beliefs about capital projects risks and guides you through tried-and-tested methods you can apply to quantify them. Once your organization produces reliable base estimates, the next challenge is to understand, quantify and communicate the uncertainties inherent to capital projects. Whether you are a risk practitioner or a senior manager, John's approach will help you frame the challenge based on years of research and experience, and offer an extensive toolset that can be readily applied by professionals. - Julien Saillard, Team Lead-External Benchmarking, Royal Dutch Shell


• "Nobody knows for sure what will happen tomorrow, but it is critical that we make the best predictions possible for the cost and schedule of our projects and programs. John Hollmann's book on Project Risk Quantifi cation provides owner cost engineers and decision-makers with tools and methods that are practical and, as the book demonstrates, realistic in order to improve our return on capital. It offers the fi rst truly integrated approach to project risk quantifi cation over the project life cycle that I have seen. It will be my guide for training. - Andres Pereira, Cost Engineer, Strategic Asset Management, Ecopetrol


• "This is a great guidebook and reference on risk quantification for cost and schedule professionals in the process industries but also for those in infrastructure and elsewhere. It is a particularly great resource for owner companies for investment decision making, including national owned companies. It contains a wealth of practical experience including useful examples. I recommend that everyone in the capital project business get a copy of this book. - Johnson Awoyomi, General Manager Cost Engineering, Nigerian National Petroleum Corp.


• "John Hollmann's new book on risk quantification is an engrossing and thought provoking read for anyone dealing with capital investment in the process industries. He starts by providing a very good summation of the common errors and misconceptions that are prevalent in dealing with uncertainty and risk. In this, his use of real life examples adds relevance to the text. He then goes on to propose practical methodologies to account for uncertainty and risk that draw on his many years of experience in the field. His emphasis on the need to seek practical solutions that can be proven to work is refreshing. - Gordon Lawrence, EMEA Manager, Capital Project Consulting Practice, Asset Performance Networks LLC.


• "John Hollmann's work has opened up a world of empirical knowledge and a type of common sense that have had a profound impact in my career. This book gives everyone access to a breadth of knowledge and practical advice regarding risk analysis in capital projects which cannot be found in existing literature. I am confident that other professionals will find this book to be an invaluable tool for dealing with all the challenges risk analysis poses for capital projects and portfolios. - Claudia Villegas Timm, Lead Portfolio Management Improvements, Wind Power Projects, Vattenfall.


• "This book is a must read for any owner, contractor or business person who needs to understand risk quantification and accuracy of estimates and schedules on capital projects and programs and how to avoid the pitfalls. John Hollmann demystifies risk analysis, challenging common industry practices and pointing the way forward with methods that provide greater confidence and credibility for informed judgement and decision-making on capital investments. It is a straight talking guide backed up by a lifetime of industry experience, anecdotes, research and recommended practices. - Les McMullan, Global Director, Project Controls, EPC Firm


• "John Hollmann shares his vast expertise while giving you practical, functional tools and a pragmatic guide to implement risk quantification methods at your own organization. I can confirm that the integrated, empirically-based methods that John shares are simply the fastest, least cost and, most importantly, the most accurate available. If you are frustrated with your organization's inability to accurately quantify risk and tired of unexpected cost overruns and schedule slips, this book is your answer! - Matthew Schoenhardt, Principal at MS Consulting.

About the Cover

John originally picked out a very nice graphic of Janus that was on the cover of Barron's magazine. Both John and I contacted Barron's to get permission to use the image, but there was no response. So we commissioned my oldest daughter, Haesel, to do a cover drawing. She used a technique called "Scratchboard," which, according to Wikipedia.com, "refers to both a medium, and an illustrative technique using sharp knives and tools for etching into a thin layer of white China clay that is coated with black India ink..." She then inked the board.To the right is an earlier version of the drawing without the ink completed.

Meanwhile our granddaughter Violette (age 14), inspired by watching her mom work, got on the computer and did her own version of Janus, which is shown below. If John writes an execuitve summary risk quantification book (we call a nominal 150-200 page book an "airplane book" as you can easily read it on an airplane trip), we can use Violette's version for that book!

From Project Risk Quantification, Table of Contents

Part 1: Understanding Risk Quantification in a Capital Project System
1 Introduction: Why Risks are Poorly Quantified. ...................................... 1
2 Risk: God of the Gate; Creator and Destroyer of Value. ............................. 9
    Who Should Read This Book? ..................................................... 11
    What is Risk? .................................................................. 14
    What Is Risk Quantification? (It is More Than Contingency) ..................... 16
    Why Focus on Risk Quantifi cation? ............................................. 18
    Myths, Misdemeanors, and Felonies .............................................. 20
    The Organization of This Book .................................................. 23
3 Phase Gate Capital Project Systems. ................................................ 25
    Systems ........................................................................ 28
    Project Management and Systems Evolution in the Process Industries ............. 29
    Scope Definition and FEL ....................................................... 32
    System and Process Maturity and Quality ........................................ 35
    Scope Definition Metrics ....................................................... 37
    Scope Definition: Driver of Cost Growth and Schedule Slip ...................... 42
4 Accuracy: Confi dence and Credibility. ............................................. 51
    Accuracy Range: Expectation versus Reality ..................................... 53
    Large versus Small Projects .................................................... 58
    Megaprojects versus Merely Large Projects ...................................... 60
    Complexity and the Disorder Dichotomy .......................................... 61
    Programs and Portfolios ........................................................ 65
    The Cost of Time and Money (Escalation, Exchange, Interest) .................... 66
    Opportunity as Threat .......................................................... 69
    Dealing with Reality ........................................................... 71
5 Investment Decision Making at the Gate. ............................................ 75
    Decision Making and Decision Analysis .......................................... 77
    Decision Models and Applied Risk Quantification ................................ 80
    The Story ...................................................................... 87
    Gate Keepers, Stakeholders, and Behaviors ...................................... 88
6 Budgeting for Risk. ................................................................ 99
    Project Control Explained ..................................................... 100
    Estimating and Scheduling Strategy Defines the Base............................ 105
    Allowances (Uncertainties Included in the Base) ............................... 107
    Contingency ................................................................... 108
    Escalation .................................................................... 114
    Exchange Rate ................................................................. 115
    Management Reserves and Authority ............................................. 116
7 Introduction to Risk Quantification Methods. ....................................... 121
    Risk Quantifi cation First Principles: What is a Good Method? ................. 122
    Good Judgment: You Can't Live Without It ...................................... 124
    Recommended Risk Quantification Methods........................................ 125
    Method Extensions ............................................................. 131
    Overall Risk Quantifi cation Methodology ...................................... 134
    Alternative Methods: Recommended (and Otherwise) .............................. 135
8 Organizing for Risk Quantification. ................................................ 141
    Competencies, Resources, and Organization for Risk Quantifi cation ............ 141
    Examples of Successful Approaches ............................................. 150

Part 2: Risk Quantification Methods and Application
9 Base Cost Estimating and Scheduling. ............................................... 155
    Base Cost Estimating .......................................................... 158
    Base Planning and Scheduling .................................................. 162
    Sources and Measurements of Uncertainty or Variability in the Base Methods .... 166
    Quality of Estimating Practices and Data ...................................... 170
    Quality of Scheduling Practices and Data ...................................... 175
    Review and Validation: Assessing Quality and Bias ............................. 176
10 Statistics and Models. ............................................................. 185
    Statistics Basics ............................................................. 186
    Descriptive Statistics ........................................................ 188
    Inferential Statistics: Multiple Linear Regression Models ..................... 196
    Inferential Statistics: Monte Carlo Simulation Models ......................... 204
    Aligning Risk Types with the Risk Models ...................................... 208
11 Systemic Risks and the Parametric Method. ......................................... 213
    Start with the John Hackney and Rand Corporation Models ....................... 214
    Implementing Customized Parametric Models ..................................... 221
    Case Example of Model Implementation .......................................... 232
    Applying the Parametric Models ................................................ 235
    Early Definition and Start-up Systemic Risks .................................. 240
    Considering Programs and Integrative Systemic Risks ........................... 245
12 Project Specific Risks and the Expected Value Method. ............................. 249
    Start with the Standard Risk Model ............................................ 250
    Considering Practicality and Realism .......................................... 252
    Applying the Expected Value Method ............................................ 255
    The Risk Quantification Workshop .............................................. 261
    Considering Programs .......................................................... 264
13 Probabilistic Escalation and Currency Exchange. ................................... 267
    Escalation and Exchange Base Estimating ....................................... 268
    Probabilistic Approaches ...................................................... 273
    Combining All CAPEX Risks   Universal CAPEX Risk Quantification ............... 276
    Obtaining Input Information ................................................... 277
14 The Tipping Point: Risk Analysis at the Edge of Chaos. ............................ 279
    The Bimodal Nature of Risk Impacts: Order vs. Disorder, Linear vs. Non-linear . 279
    Complexity and Stressors: Agents of Disorder .................................. 281
    A Tipping Point Warning Indicator ............................................. 284
    The Tipping Point in a Quantitative Model ..................................... 286
    A Tipping Point for Super Blowouts (Outliers) ................................. 288
15 Estimate Accuracy for Various Industries and Contractors ....................... 291
    Accuracy References and Data for Various Industries .............................. 292
    Interpretation of the Industry Data ........................................... 295
    Outliers: Beyond the Pale (Beyond p90) ........................................ 301
    Schedule Risk ................................................................. 306
    Contractors and Contractor Data ............................................... 307
16 Communicating Risk Quantification Outcomes. ....................................... 313
    Telling the Story ............................................................. 314
    Tables and Figures ............................................................ 318
    Dealing with Show Stoppers .................................................... 322
17 Budgeting for Risks and Account Control ........................................... 327
    Risk Funds and Time Accounting ................................................ 328
    Risk Funds and Time Control ................................................... 333
18 Closing the Loop . ................................................................ 337
    Capturing Historical Project and Risk Information ............................. 338
    Developing Risk Models and Tools .............................................. 345
    Calibrating and Maintaining Risk Models and Methods ........................... 347
    Improving the Project System .................................................. 349
Appendix A: The Hybrid CPM with MCS Method ........................................... 353
    Base CPM with MCS Method ...................................................... 353
    The Hybrid Approach ........................................................... 355
    Risk Response Treatment ....................................................... 357
    Tipping Point ................................................................. 358
    Communicating Risk Outcomes ................................................... 359
Appendix B: Addressing Bias in Project Systems Focused on Predictability. ............ 361
    Natural Cost Growth Behavior versus the Cresting Wave ......................... 362
    Addressing Overestimation Bias in Historical Analysis and Modeling ............ 364
Glossary. ............................................................................ 367
    List of AACE Recommended Practices (RPs) ...................................... 392
Index. ............................................................................... 393